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Month gone by – A snapshot
Global equity markets were adversely affected by developments around US-China trade talks and Brexit. The MSCI DM (Developed Markets) and EM (Emerging Markets) indices declined by 6% and 8% respectively. Indian equity markets outperformed significantly, driven by a strong election mandate leading to the formation of a stable government. The 10 year G-sec yields dropped by almost 40 bps during the month as crude oil prices fell 11%. INR ended the month steady as EM currencies’ weakness was offset by relatively strong FPI inflows.

A second term for the Modi government
In General elections 2019, BJP-led NDA won 353 seats out of 542 seats in the Lower House, including 303 for BJP itself. The formation of a stable government has helped in allaying market concerns. The government is expected to continue with the economic reforms undertaken in its previous term.

Weakening economic growth
India’s real GDP growth for Q4FY19 came below estimates at 5.8% (vs. 8.1% in Q4FY18 and 6.6% in Q3FY19). The contraction in agricultural activity and slowdown in industrial activity significantly impacted growth.  However, services sector saw an improvement led by ‘finance and real estate’ component which grew at a robust pace. The FY19 full year GDP growth stood at 6.8% which is 20bps below the provisional estimate forecast.

Inflation rises to 6-month high of 2.9%
Rising food prices pushed up the headline CPI to its 6-month high of 2.9% in April 2019. The monsoon will be a key determinant of food inflation, going forward. The Indian Meteorological Department (IMD) has reiterated that rainfall over the country, as a whole, is likely to be normal. The core inflation for the month of April fell to an 18-month low of 4.6%, reflecting weaker demand trends, as indicated by weakness in clothing, household goods and services, health, transportation and education.

Fixed income markets witnessed significant yield decline
Fixed income markets ended the month positive, with the yield on the 10Y bond dropping by almost 40bps to end at 7%. This fall was driven by decline in crude oil prices (down 11% during the month), fall in global bond yields and expectations of rate cuts by RBI. Foreign investors were net buyers of US$359mn in fixed income market in May (CYTD inflows of US$68mn).

Outlook: Weak domestic growth, stable currency, falling global bond yields and support from low crude oil prices provides room for RBI to cut policy rates. The possibility of higher government borrowing, uncertainties around monsoon and trajectory of crude oil prices remain key monitorables.

Equity markets exhibited strong performance
Equity markets remained buoyant on the back of strong political mandate. Nifty rallied 1.5% in May. The domestic sectors such as banking and financial services, infrastructure and capital goods outperformed whereas metals, pharmaceuticals and consumer goods were laggards. BSE Midcap was up 1.4%, indicating that the rally was broad based. FIIs purchased $1bn equities in May (CYTD inflows of $10.8bn), while domestic institutional investors turned net buyers with net inflows at $700mn (CYTD outflow of US$1.7bn).

Outlook: Trade war concerns continue to intensify, which can adversely impact global economic growth and corporate earnings. From Indian market’s perspective, the government’s action plan to revive economic growth and RBI’s policy actions are being keenly watched. The Union Budget, expected in early July, remains an important factor for the market. We continue to remain positive from a medium to long term perspective.


Economic and market snapshot

Indicators

April 2018

Jan

2019

April

2019

QoQ Change

YoY Change

Economic indicators

 




 

Consumer Price Index (CPI) Inflation (%)

4.3

2.1

2.9

0.8

-1.4

Gross Domestic product (GDP Growth) %

7.7

7.0

6.6

-0.4

-1.1

Index of Industrial Production (IIP) (%)

6.9

0.2

0.1

-0.1

-6.8

Brent crude oil (USD/barrel)

75

62

73

18%

-3%

Domestic Markets

 




 

Nifty Index

10,739

10,831

11,748

8%

9%

BSE Mid-cap Index

17,012

14,560

14,889

2%

-12%

10-year G-Sec Yield (%)

7.8

7.3

7.4

10bps

-40bps

30-year G-Sec Yield (%)

8.0

7.7

7.7

0bps

-30bps

10-year AAA PSU Corporate Bond Yield (%)

8.4

8.4

8.4

0bps

0bps

Exchange rate (USD/INR) *

66.7

71.1

69.6

2%

-4%

Global Markets

 




 

Dow Jones (U.S.)

24,163

25,000

26,593

6%

10%

FTSE (U.K.)

7,509

6,969

7,418

6%

-1%

Shanghai Stock Exchange Composite Index (China)

3,082

2,585

3,078

19%

0%

Nikkei 225 (Japan)

22,468

20,773

22,259

7%

-1%

Source: Central Statistics Organisation (CSO), RBI, Reuters, Bloomberg. *Negative change signals appreciation while positive change signals depreciation.

10-year government bond yield trend
Equity market performance